Looking For Capital For Property Development? Keep Up With The P.A.C.E.
Illinois is finally with the times – we are “going green”. No, I’m not talking about the upcoming approval of recreational marijuana – although that will help with the budget issues. No, today we are talking about another initiative taken up by other states, successfully, that has boosted state economies – P.A.C.E. Standing for Property Assessed Clean Energy, P.A.C.E. funding is a system of private loans with public administration that provides additional incentives for both property owners and lenders to invest in energy efficient construction and building upgrades.
Active in states like California since 2007 but only passed in Illinois in 2017, P.A.C.E. funding is finally starting to get going at the local level. The City of Chicago will start processing P.A.C.E. loans January 1, 2019, and projects like the Uptown Theatre – which is projected to utilize over $40M of P.A.C.E. funding – are already planning their submissions. DuPage County and the City of Rosemont have also green-lit P.A.C.E. programs, and it is expected that counties and cities across Illinois will be following these early adopters and open up their own P.A.C.E. markets in 2019.
If you are planning, or considering, a commercial or multi-tenant residential development project, the answers to the most common P.A.C.E. questions are below. If you have more questions – or need to discuss how to work with a P.A.C.E. funding broker – please contact Joe Kreeger at Troglia Kaplan.
What is P.A.C.E. Funding?
P.A.C.E. Funding, provided for in Illinois’ Property Assessed Clean Energy Act, which was made effective on August 11, 2017, is a method of providing property owners (other than residential properties with under 5 tenants) loans they can receive from both governmental and non-governmental sources to cover the costs of energy efficiency improvements.
What are “energy efficiency improvements”?
In short, equipment, devices, or materials that will decrease energy consumption. This includes insulation, windows, sealing, lighting fixtures, and light bulbs, as well as more complex items like energy control systems, distribution systems, energy recovery systems, and energy generation systems, such as solar panels.
What do these improvements cost?
If done right, nothing – at least the way the accountants see it. By design, the amount of the project is capped by the energy savings to the property, as amortized over the life of the loan. For example, if a new energy system in a building will save $1M over 5 years, P.A.C.E. Funding will provide a $1M, 5-year note. The note is paid back at roughly $200K a year, with energy savings of roughly $200K a year, leading to little to no cost for the property owner.
If the amount of savings is increased, or the useful life of an item in a project is longer, the amount and duration of the loan can be increased. If there are multiple components of a project, the savings can be totaled and divided over the part of the project with the longest use life. This grouping of project costs can also allow items that are very efficient to be paired with items that provide less efficiency, allowing the biggest cost savers to subsidize other parts of the project.
There are interest payments and fees typically associated, but generally, the energy savings pay for the cost of the loan.
How much funding is available?
Up to 25% of the total appraised or assessed value on the property, based on the future value once the work has been completed.
Who provides these loans? Will I get pushback for getting taxpayer money?
Loans can be provided by governmental organizations, but it is far more likely that the loans come from a private source, such as a bank, private equity firm, or other capital partners. In most cases, no taxpayer money is utilized, and the program is actually a net positive for the governmental body administering the program.
How does the government benefit?
In order for a P.A.C.E. loan to be made, the loan has to be approved by a P.A.C.E. program administrator, who ensures that all of the project requirements are fulfilled, and that the property owner certifies that the work is completed. They get a fee for acting as the loan administrator – taking in the property tax assessment (typically alongside traditional property tax payments) and providing it to the lender.
Why would a lender want to do this – why not just invest directly and remove the cost of the administrator?
P.A.C.E. Funding, like Tax Increment Funding (TIF), is paid back through a lien on the property and not a traditional mortgage. Unlike a mortgage, which allows a lender to foreclose and take possession of the property, a lien stays with the property – not the borrower - and is treated the same as property taxes. The lien remains with the property when it is sold, and if the lien is defaulted on, it can be treated similarly to other back taxes, which have a very high rate of collection. This mechanism, due to its high level of security, has created a high level of interest from private equity firms and family offices.
Why would a senior lender on the property allow another lender to have a superior position?
Because rights of the P.A.C.E. Noteholder sit parallel to the rights of the senior lender, not above or below it. The senior lender can still foreclose on a property and sell it to satisfy the debt – it is just subject to the additional amount of back property tax from P.A.C.E. This is not a significant change from their previous position, and the additional payments are likely to be less of a deterrent than the energy upgrades are a benefit for future sale. Senior lenders are required to approve the P.A.C.E. financing, but they typically do.
So I can get a loan that pays for itself through energy savings, which lenders are looking to make due to lien status, and the debt doesn’t go on my balance sheet. Why wouldn’t I want to do this?
It is hard. Engineering energy efficiency savings is a complicated process that requires understanding building systems, keeping up to date on the latest energy technologies, conducting value engineering to find energy savings, and partnering lenders who understand this process, which is relatively new in Illinois.
Can someone do this for me?
Yes. P.A.C.E. funding providers use its team of both energy and finance engineers, combined with a network of product and capital partners, to provide efficient capitalization to projects. They also provide financing packages that maximize tax credits and non-P.A.C.E. debt, allowing developers to maximize their equity in projects and minimize the time spent on fundraising efforts. Often times these financing projects also include senior debt, and can provide more than half of project financing.
How long does this take?
If an area is pre-approved for P.A.C.E. Funds and the developer has sufficient plans to begin value engineering, financing can be achieved in as little as 45 days, pending local governmental approval.
What if I have questions?
Contact Joe Kreeger at firstname.lastname@example.org to discuss further questions regarding P.A.C.E. Funding in Illinois.